Italy could do with some market pressure. Rome’s bond yields are now lower than they were before February’s inconclusive election. But as the politicians scheme, the economy burns. With markets calm, there is insufficient urgency to crack on with long-needed economic and political reform.
The fall in 10-year bond yields, which were 4.3 percent on Friday compared to 4.4 percent just before the election, is attributable to two factors. First, nobody wants to bet against the European Central Bank which has promised to do whatever it takes to preserve the euro. Second, the Japanese central bank’s pledge to buy gigantic quantities of bonds at home has buoyed asset prices elsewhere, including in Italy.
The backdrop to the current political crisis is starkly different to that in November 2011, when a sharp increase in bond yields created a panic which led to Silvio Berlusconi being forced out of office. Now none of the three main political blocs – Berlusconi’s centre-right group, the centre-left Democrats and Beppe Grillo’s 5-Star Movement – can govern on its own. But seven weeks have been wasted without a coalition being formed.
Action has now turned to selecting a new president to replace Giorgio Napolitano. An electoral college made up of parliamentarians and representatives from Italy’s regions will on April 18 start the process. The machinations are highly complex, as I discovered in Italy last week, and could yet unblock the situation. But there are many potential pitfalls.
The role of Italian president used to be a largely ceremonial one. But its power has grown under Napolitano who showed how the president could steer the country in a political crisis, for example by replacing Berlusconi with the unelected Mario Monti.